―Loans for Shares‖ Revisited Daniel Treisman 1 Abstract The ―loans for shares‖ scheme of 1995-6—in which a handful of well- connected businessmen bought stakes in major Russian companies—is widely considered a scandalous affair that had disastrous consequences for the Russian economy. Fifteen years later, I reexamine the details of the program in light of evidence available today. The critics were right that the scheme’s execution appeared corrupt. However, in most other regards the conventional wisdom turns out to be wrong. The stakes involved represented a small fraction of the market; the pricing in most cases was in line with international practice; and the scheme can only explain a small part of Russia’s increasing wealth inequality. The biggest beneficiaries were not the so-called ―oligarchs,‖ but Soviet-era industrial managers. After the oligarchs consolidated control, their firms performed far better than comparable state enterprises and helped fuel Russia’s rapid growth after 1999. Published in Post-Soviet Affairs, 26, 3, July-September 2010, 207-27. 1 Professor of Political Science, University of California, Los Angeles. The author thanks Serguey Braguinsky, Lev Freinkman, Scott Gehlbach, Martin Gilman, Sergei Guriev, Andrei Shleifer, and Konstantin Sonin for comments and valuable conversations, and the UCLA College of Letters and Science for financial support. A version of this article circulated as NBER Working Paper No.15819. The analysis draws at various points on a brief discussion of loans for shares in Shleifer and Treisman (2005, pp.161-2). A short summary of the argument appears in Treisman (2010).
31
Embed
―Loans for Shares‖ Revisited - Social Sciences · ―Loans for Shares‖ Revisited Daniel Treisman1 Abstract The ―loans for shares‖ scheme of 1995-6—in which a handful of
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
―Loans for Shares‖ Revisited
Daniel Treisman
1
Abstract
The ―loans for shares‖ scheme of 1995-6—in which a handful of well-
connected businessmen bought stakes in major Russian companies—is
widely considered a scandalous affair that had disastrous consequences for
the Russian economy. Fifteen years later, I reexamine the details of the
program in light of evidence available today. The critics were right that
the scheme’s execution appeared corrupt. However, in most other regards
the conventional wisdom turns out to be wrong. The stakes involved
represented a small fraction of the market; the pricing in most cases was in
line with international practice; and the scheme can only explain a small
part of Russia’s increasing wealth inequality. The biggest beneficiaries
were not the so-called ―oligarchs,‖ but Soviet-era industrial managers.
After the oligarchs consolidated control, their firms performed far better
than comparable state enterprises and helped fuel Russia’s rapid growth
after 1999.
Published in Post-Soviet Affairs, 26, 3, July-September 2010, 207-27.
1 Professor of Political Science, University of California, Los Angeles. The author thanks Serguey
Braguinsky, Lev Freinkman, Scott Gehlbach, Martin Gilman, Sergei Guriev, Andrei Shleifer, and
Konstantin Sonin for comments and valuable conversations, and the UCLA College of Letters
and Science for financial support. A version of this article circulated as NBER Working Paper
No.15819. The analysis draws at various points on a brief discussion of loans for shares in
Shleifer and Treisman (2005, pp.161-2). A short summary of the argument appears in Treisman
(2010).
2
On November 3, 1995, in the remote Siberian town of Surgut, an auction took place for the right
to lend the cash-strapped Russian government tens of millions of dollars. As collateral for the
loan, the government had pledged a 40 percent stake in the country’s fifth largest oil company,
Surgutneftegaz. Two bidders made it into the auction room; a third had been disqualified because
of problems with the applicant’s paperwork. Had any others planned to fly out from Moscow to
participate, they would have had trouble: the local airport mysteriously chose to close that day.
When, late in the evening, the participants emerged, the winner turned out to be Surgutneftegaz’s
own pension fund.
Thus began what came to be known as ―loans for shares.‖ This program, under which
stakes in 12 companies were eventually sold to selected private investors, quickly took on mythic
proportions in accounts of Russia’s economic transformation. Widely condemned, it became a
symbol of all the errors and sins—real or alleged—of Yeltsin’s reformers. The program was a
―Faustian bargain,‖ wrote one journalist, a ―fiendishly complicated scheme,‖ in which the liberal
ministers had sold their souls to a cabal of unscrupulous tycoons, who—switching metaphors—
quickly metamorphosed into a ―Frankenstein’s monster.‖ It ―deformed‖ the economy,
―impoverished‖ the population, and laid ―a corrupt, inegalitarian foundation for everything that
came after it‖ (Freeland, 2000, pp.22-3, 169-89). Under loans for shares, contended one Nobel-
prize-winning economist, the country’s best firms were stripped of their assets. ―The enterprises
were left on the verge of bankruptcy, while the oligarchs’ bank accounts were enriched‖ (Stiglitz,
2002, p.160).
Given the resonance the program had—and continues to have even 15 years later—it is
worth revisiting the details to see how well the popular image fits the facts. Based on what we
3
now know, were the claims of the program’s critics justified? Do the interpretations offered at the
time fit the evidence available today?
The facts of the scheme were actually quite simple. The government gave—usually
minority—tranches of shares in 12 large, state-owned corporations to certain businessmen to
manage in trust, in return for loans to the federal budget totaling about $800 million. Besides
Surgutneftegaz, the companies included the oil corporations LUKoil, Yukos, Sidanko, and
Sibneft as well as the nickel producer Norilsk Nickel and the Mechel and Novolipetsk Steel
Works. If the government did not repay the loans by September 1996, the creditors were then
allowed to auction off the tranches and keep 30 percent of any profit. In the event, the
government did not repay the loans, and the creditors sold the stakes, usually to themselves.
Competition was kept to a minimum through careful rigging of the auctions.
In this paper, I attempt to answer five questions. How large were the stakes involved?
Did the auction winners underpay, and if so, by how much? Why did the government agree to the
program? How was it implemented? And what consequences did it have for the companies
involved, for the country’s rate of growth, and for economic inequality? I find that the critics
were correct that the scheme’s execution appeared corrupt. It is also true that in the three years
after the auctions, the winners did their utmost to squeeze out minority shareholders in ways fair
and foul.
Beyond that, however, the conventional wisdom appears wrong on numerous points. I
find that: the program’s scale was far more modest than suggested at the time; the pricing was, in
most cases, in line with international practice; the biggest winners were not the so-called
―oligarchs,‖ but entrenched Soviet-era managers; subsequent performance of the main loans for
shares firms was far better than that of similar companies that remained state owned; and the
dramatic output increases of the oligarch firms helped fuel Russia’s impressive growth after 1999.
In short, the way implementation of the scheme was handed over to interested parties was a
4
scandal, but there is little evidence that the program had most of the negative consequences
attributed to it. On the contrary, it helped catalyze Russia’s eventual rebound.2
HOW LARGE WERE THE STAKES INVOLVED?
Journalists characterized the 12 companies whose shares were pledged as the ―crown jewels‖ and
―behemoths‖ of the Russian economy (e.g. Freeland, 2000, p.170). From the coverage, one could
easily get the impression that a large slice of Russia’s industrial base changed hands in the
operation. In fact, although some of the companies were significant ones, the scale was rather
more modest.
The original plan had foreseen inclusion of 43 enterprises (Kokh, 1998, p.108). But the
managers of most of these managed to arrange the exclusion of their companies, bringing the total
down to 16. Four of these failed to attract a single bid. Of the 12 companies for which there were
bids, most were already trading on Moscow’s stock markets as of late 1995. If one values the
shares pledged by the government at their market prices when the program began, their total
value came to about $1.5-1.9 billion, or 8-10 percent of the total capitalization of the Russian
stock market at that time.3 For comparison, an estimated $2.5 billion worth of stock in just the
2 For an authoritative account of the ideas behind Russian privatization and how it was
implemented in practice, see Boycko et al. (1995).
3 The figure is only approximate, since share prices were not available for two of the 12
companies—Sidanko, and the much smaller Nafta-Moskva. The market capitalizations of the
stakes in the other 10 companies on October 2, 1995, as recorded in the database of the magazine
Ekspert, sum to $1.45 billion (http://raexpert.ru/ratings/expert400/1995/capitalization/), or 7.6
percent of the total market capitalization of $19 billion (Russian Economic Trends, 1996, p.114).
Supposing that Sidanko would have been valued similarly to the oil companies Yukos, Sibneft, or
Surgutneftegaz, the 51 percent stake in it would most likely have had a market value of
Nafta Moskva 15 20.01 n.i. n.i. n.i. n.i. n.i. Novorossiysk Shipping 45 22.65 n.i. 38.1 40.1 n.i. n.i. Won by other Mechel 15 13.3 n.i. 2.5 n.i. n.i. n.i. Total 780 1,445 2,058
Sources: Russian Economic Trends (1997, p.108; 1998a, p.88; 1998b, p.44); The Moscow Times (August 1, 1996; August 30, 1996; September 3, 1996); Ekspert database. Total price received by state is adjusted for the creditor’s 30
percent commission on the sale. n.i.: no information. a winner also had to pay off $227 million of the company’s
tax arrears within 10 days.
On this basis, it appears that the winners received a discount relative to the current share
price of about 13 percent for the stake in Norilsk Nickel, 16 percent for that in Sibneft, 45 percent
for that in Yukos, 69 percent for that in Surgutneftegaz, and 89 percent for that in LUKoil. If we
value the companies instead at their market capitalizations in August-September 1996 (the
deadline for the government to repay the loans and reclaim the shares) the discount would be
somewhat higher in most of these cases: 28 percent for Norilsk Nickel, 46 percent for Yukos, 53
percent for Sibneft, 88 percent for LUKoil, and 89 percent for Surgutneftegaz.11
For these five
11
In addition, some of the winning bidders were required to make large investments in the
companies, which I do not take into account in calculating the discounts. Of course, they, as the
11
companies, based on the 1995 capitalizations, the total discount received came to about $727
million; using 1996 valuations, it was $1.36 billion.
If one accepts these rough estimates, they suggest several things. First, by this metric, the
winners did pay less than the market value of the shares. Again, however, some context is useful.
In fact, some discount is virtually universal in IPOs or major share issues by state-owned
companies, and the discount tends to be large in developing and middle income countries. A
discount is considered necessary to ensure the placement of large blocks of shares
simultaneously. Laurin et al. studied privatizations in 10 emerging markets (other than Russia)
and found that on average state companies that were privatizing underpriced their share offerings
by about 34 percent relative to the stock price after the first day (Laurin et al., 2004, p.415). This
was exactly the same average discount on share issue privatizations estimated by Jones et al. from
data on 630 share offerings in both developed and emerging markets (Jones et al., 1999;
Megginson, 2005, p.212). Ariff et al. examined 29 privatizations in Malaysia and Singapore and
found that on average the Malaysian shares were sold at a 57 percent discount and the Singapore
shares at a 29 percent discount.12
In this light, most of the discounts for the Russian loans for
shares companies do not look completely out of line.
Second, Table 1 suggests that the biggest winners from the program were not the so-
called oligarchs—outside investors who raised their seed capital in trade and banking—but the
―red directors‖—insiders who used the program to consolidate control over companies they
already managed. However one estimates the discounts, by far the largest went to the managers of
LUKoil and Surgutneftegaz, who bought shares in their own corporations—in Surgutneftegaz’s
shareholders, would benefit from the value created by such investments. In some cases, it was
reported that the investments were not made.
12 That is, one day after the share issues, the Malaysian shares were worth 134 percent more and
the Singapore shares were worth 42 percent more (Ariff et al., 2007).
12
case, using money from the firm’s own pension fund. Valued at October 1995 share prices, the
winners of the stakes in LUKoil and Surgutneftegaz got a total discount of $542 million; on their
stakes in Yukos, Sibneft, and Norilsk Nickel, Khodorkovsky, Berezovsky, and Potanin received a
total discount of $185 million.
For comparison, consider again the privatization of Gazprom, the most valuable
corporation controlled by red directors. Of the 58.9 percent of the company’s shares given away
for privatization vouchers in the early 1990s, 10 percent were initially transferred to the company
itself in return for vouchers and later sold at very low prices to affiliated firms ―owned largely by
relatives and associates of top Gazprom executives.‖13
Another 15 percent were distributed to the
company’s workers. Another 33.9 percent were sold at voucher auctions run by the company in
different regions of Russia. In October 1995 as the loans for shares auctions got underway,
Gazprom’s market capitalization was $4.3 billion.14
Thus, value worth $2.5 billion was given
away for vouchers, at least $1 billion of this to the management and workers. Next to this, the
roughly $185 million discount to the three oligarchs looks somewhat less dramatic.
HOW WAS THE PROGRAM IMPLEMENTED?
The way the auctions were conducted—both those for the right to lend and those for the shares—
gave the impression of blatant cronyism (Hoffman, 2003, pp.312-20). The winners often turned
out to be front companies for the auctioneers themselves. Winning bids came in just marginally
above the starting price. In some cases, arbitrary conditions were imposed that would be hard for
any but the designated winner to fulfill. Surgutneftegaz held its auction in a remote Siberian
13
Novie Izvestia, 2 September 1999, pp.1-2. For more details on the voucher sales, see Shepherd
(1993).
14 Ekspert database on capitalization, http://raexpert.ru/ratings/expert400/1995/capitalization/.
Source: Calculated from Ekspert database (www.expert.ru/ratings/), checked where possible against audited company financial statements; press reports for some employment figures.
20
Table 2 Assets and investment of three “loans for shares” companies 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Yukos Total assets, bn $ 4.7 5.2 5.3 6.0 10.3 10.5b 14.4b 18.5f Net additions to property, plant, equipment mn $
Sources: Company annual reports and audited financial statements, adapted and updated from Shleifer and Treisman (2005); Grace (2005, p.122); upstream capital spending from OECD (2004). a net additions to capital assets; purchase of capital assets. b as in 2002 Annual Report. c restated in 2002 Annual Report. d book assets reduced by $1.3 bn because of accounting change. e Jan-October 2003. f as of third quarter.
In fact, the most serious asset stripping scandals involved companies in which the state
retained large stakes. In the 1990s, Gazprom’s management was accused of diverting assets into a
network of companies owned by the managers (Åslund, 2007, p.142). Assets of the state-owned
airline Aeroflot fell between 1997 and 2002.27
Indeed, it is striking how differently the oligarchs
behaved in companies they owned and in those where they merely influenced the management
(such as Aeroflot, where Berezovsky had partial control). The claim that they privatized firms in
order to strip assets gets it backwards. They—along with the red directors—stripped assets from
state-controlled companies in order to accumulate funds to buy shares when such enterprises
were sold. The need to stop such theft was one of the main reasons to hasten privatization.
27
Data from Aeroflot’s annual financial statements.
21
HOW DID THE OLIGARCHS’ CONTROL OVER MAJOR
COMPANIES AFFECT THE RUSSIAN ECONOMY?
Did the after-effects of loans for shares depress economic growth? In fact, the opposite is true.
Russia’s rapid growth in the years from 1999 to 2004 was catalyzed by the extremely high growth
of oil production in the oligarchs’ companies. Between 1999 and 2003, revenues of Yukos,
Sibneft, and Norilsk Nickel grew much faster than GDP.28
The output of oil and gas condensate
of the companies sold to oligarchs in loans for shares (Yukos, Sibneft, Sidanco) rose by 62
percent between 1999 and 2003; output of the two companies sold to red directors (LUKoil and
Surgutneftegaz) rose in the same years by 46 percent; that of the three state-owned oil companies
Rosneft, Tatneft, and Bashneft rose by just 15 percent (OECD, 2004, p.85).
Did loans for shares ―impoverish‖ the population? It is hard to see how. The proportion
of the population with incomes below the poverty line averaged 28 percent in the four years
before loans for shares; in the four years after the program, the proportion averaged 24 percent.
Since then, the poverty rate has fallen to 13 percent (Goskomstat Rossiiskoy Federatsii, various
years). What about inequality? The wealth of Russian big businessmen did expand dramatically
in the years after the loans for shares sales, and this must have exacerbated wealth inequality.
However, this was true of both those who participated in loans for shares and the many more who
did not. Fortunes were created by the rise in world commodity prices, the restructuring of Russian
enterprises, and the consequent ascent of the Russian stock market. By 2008, there were 87
Russians on Forbes’ list of the world’s 1,125 billionaires. Of these, only eight had anything to do
28
My calculations from the Ekspert database, www.expert.ru/ratings/.
22
with the loans for shares auctions.29
In fact, only three of the seven original oligarchs that
Berezovsky mentioned in his famous 1996 Financial Times interview—in which he claimed that
he and six other bankers together controlled half the Russian economy—won anything in loans
for shares.30
Two—Mikhail Fridman and Pyotr Aven—complained angrily about their exclusion.
29
These were Boris Berezovsky, Roman Abramovich, David Davidovich (of Abramovich’s
Millhouse), Vladimir Potanin, Potanin’s partner Mikhail Prokhorov, Vagit Alekperov and Leonid
Fedun of LUKoil, and Vladimir Bogdanov of Surgutneftegaz. See